Today's stock market saw a sharp decline in the Nikkei Index. Well actually this decrease is just the beginning. We will explain why in the lines below.

According to the US Central Intelligence Agency (CIA) Japan's public debt is about 214% of the GDP (see HERE), according to the International Monetary Fund (IMF) it is 229% of GDP (see HERE) and according to CNN it is expected to reach 230% of GDP next year (see HERE). I do not know the truth but let us simply assume an estimate of 220% of GDP, which is safe and simple for calculations.

As the government yields of JAPAN are at about 1%, it means that to serve this debt the government of Japan needs to pay in annual interest a amount equivalent to 1%x220% of GDP = 2.2% of GDP. But Japan's economy is not really growing (negative GDP growth in the past years as seen on the World Bank chart HERE), so it is not very easy to find these 2.2% of GDP to pay for the interest rates. If the Japanese government raises new taxes, it will be equivalent to taking 2.2% of GDP growth from the econnomy, which for Japan means destroying growth, and you can be sure that this is not going to happen since the government wants to be re-elected some day. Finding savings by cutting the government budget is also hardly feasible: the Japanese government is already running deficits year in and year out to create massive stimulus packages to keep the economy working. So the Japanese government is not able to increase taxes or savings to pay interests on its debt, let alone reimbursing this debt.

The only way to keep the system going is to borrow more every year. Which explains that the Japanese government increases its debt with 5%-10% of GDP every year. There is a simple lesson to learn from this: they are not able to pay this back !

What will happen in a couple of years? It will be more and more difficult for the Japanese to find people willing to lend them money at a 1% rate since people start now to understand that the Japanese cannot pay back. So investors will ask for higher risk-adjusted returns. Investors can very soon start to ask for 5% or 8% rates to the Japanese Governement. As a benchmark Greece's10-y Govt Bond Yields is 8.6% at the time I write this article and Greece is actually better off than Japan since it has a lower ratio DEBT/GDP than Japan and is backed by rich EU countries. If the interest rate that Japan needs to pay raises and reaches 5%, then the government will need to pay annually 5%x220% of GDP = 11% of GDP each year just in interest rates. This is too much to bear for any government or country.

In essence the Japanese government will default on its debt within a few years, which will result in a massive devaluation of the Japanese currency and will lead to a dreadful economic crisis in the archipelago. So you can expect most established Japanese firms to either go bankrupt or take a very severe hit in a few years from now.DON'T INVEST IN JAPAN!